SCO: A West Texas farm bill tale

The biggest wild card in the farm bill this fall could be an old-new idea from weathered West Texas with the nickname: SCO.

That stands for Supplemental Coverage Option — a mouthful for what began as a pretty straightforward plan to let farmers buy lower-cost crop insurance based on county-wide losses, not those of a single farm.

President George W. Bush, raised himself in Lubbock, included something like it in his administration’s alternative farm bill in 2007. And the concept has been championed by a string of House Agriculture Committee members from the Abilene area — the latest being Rep. Randy Neugebauer (R-Texas).

But what began as protection against county-wide disasters like drought — “It wouldn’t work for hail,” says Holt — has evolved into more like insurance against shallow losses to the top end as well.

In the latest configuration, SCO’s premiums would be subsidized by the government at a 65 percent rate with only a 10 percent deductible and no payment limits. This generosity comes at a price, and new cost estimates are raising concerns about how much House-Senate negotiators can devote to the program.

The Congressional Budget Office predicts that SCO will cost about $3.85 billion over the next 10 years under the House bill. This accounts for about half of all the increased spending for crop insurance above CBO’s baseline.

A new study by the University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) goes a big step further. It blames SCO for much of what FAPRI estimates are an added $3.3 billion in costs for the House bill – beyond the CBO scoring.

The Environmental Working Group, a frequent critic of the farm bill generally, released its own 19-page report Thursday morning lampooning SCO under the title “Pumped Up: How Supplemental Insurance Could Bulk Up Farm Subsidies.”

“Guaranteeing 90 percent of a farmer’s revenue, mostly at taxpayer’s expense, would transfer too much risk to the public,” EWG found. “At this level of coverage the program would function more like a government support program than a true safety net.”

At a time when Senate negotiators are already looking for savings to offset food stamp cuts in the House bill, the result is sure to be pressure for changes in SCO.

The single biggest factor in the FAPRI’s analysis is the 10 percent deductible allowed for farmers who enroll in both SCO and the new countercyclical, target price program in the House bill.

Indeed, FAPRI’s numbers show that for corn, soybeans and wheat, farmers will gain more per acre from enrolling in SCO than they will get under the House’s price loss coverage or countercyclical program.

The Senate bill also allows for a 10 percent deductible for SCO. But FAPRI’s economic model shows that many more farmers will accept for a higher 22 percent deductible for SCO in order to qualify for a fully-subsidized ARC program— the Senate’s answer to shallow losses.

ARC — the letters stand for Agricultural Risk Coverage — has been tailored by Midwest senators to closely match the needs of corn and soybeans. Not surprisingly, FAPRI shows that these two crops stand to get the largest return per acre from the Senate program.

But for rice, barley, and peanuts, the House combination of SCO and price loss coverage is far better.

Two points stand out in the debate.

First is the vulnerability of all these calculations in trying to predict the behavior of farmers. It’s an almost classic conflict: The “rational” economist trying to predict the behavior of a very individualistic — some say, contrarian — population.

Learning from past mistakes, FAPRI says it has tried to be more conservative in its participation estimates. Nonetheless, skeptics argue that SCO – as a program — has a long way to go before its up and running. And back in 2008, FAPRI was predicting that a new program then — called ACRE — would take off when it never did.

The second lesson that comes out of the FAPRI numbers is how much SCO can be seen as an alternative to the revenue protection promised by ARC.

Both add a lower cost layer to the current crop insurance system. ARC is being offered free to the farmer but is also narrower than SCO. SCO requires a partial premium payment but one considerably more subsidized than individual farm coverage above 65 percent.

Some combination of these elements might be a route to also find the added savings needed to get a farm bill enacted.

The history of West Texas is telling also.

The region gave rise to the late Elmer Kelton, an agricultural reporter himself who became a highly respected writer of Westerns, set in the past but also more modern West Texas.

“The Time It Never Rained” was the title of one of his novels — apt for any discussion of crop insurance. And in an interview with The Dallas Morning News two years before his death he summed it up this way:

“I have often been asked how my characters differ from the traditional, larger-than-life heroes of the mythical West,” Kelton said. “ ‘Those,’ I reply, ‘are 7 feet tall and invincible. My characters are 5-8 and nervous.’”